Viewpoint: Hawaii Supreme Court Rules in Favor of Work Comp Subrogation

Workers’ compensation carriers doing business in Hawaii held their collective breathe for 2021 waiting on the Supreme Court to decide whether it would incorporate the common law Made Whole Doctrine to workers’ compensation liens. The case, Moranz v. Harbor Mall, LLC had been silently before the state’s highest court since May 13, 2021, and was submitted without oral argument and without any amicus briefs. The case concerned subrogation practitioners because the Court of Appeals decided that equitable considerations and defenses were inapplicable to statutory workers’ compensation liens. After all, if the Court of Appeals decision was correctly decided, why would the Supreme Court need to take the case? So, we sat quietly and waited for a decision.

On Jan. 11, 2022, we received great news. The Hawaii Supreme Court handed workers’ compensation subrogation a much-needed victory. While the valuable right of subrogation is under attack by plaintiff-leaning judges and legislators across the country, the new Supreme Court decision does the following: (1) holds that common law equitable defenses to subrogation such as the Made Whole Doctrine are not applicable to the statutory framework of workers’ compensation, (2) holds that the carrier’s lien extends to all damages in a third-party recovery, both special and general; and (3) clarifies how future credits are to be calculated under the Alvarado formula.

Moranz was a restaurant employee who, while employed by Kiewit Pacific Company, slipped and fell at Harbor Mall in Lihue, Kaua’i. She filed for and received $63,245.41 in medical, indemnity, and vocational rehabilitation benefits from DTRIC Insurance Company, the workers’ compensation carrier for Kiewit. Moranz also stipulated to a settlement of her future benefits in the amount of $125,816.72 for a total of $189,062.12 in benefits. Moranz then filed suit and settled with the mall for $200,000. Moranz’s lawyers labeled the settlement as “general damages” (damages such as pain and suffering, loss of consortium and emotional trauma, etc.). Because the settlement contained no special damages, she argued that DTRIC did not have a lien on her recovery. In Hawaii, special damages are the damages that may be readily quantified, such as medical expenses or lost income, while general damages are damages that may not be readily quantified, such as pain and suffering, mental anguish, and loss of enjoyment of life.

Hawaii’s workers’ compensation subrogation statute—§ 386-8—provides a clear formula for allocating recoveries by employees in third-party claims. An employee is entitled to first deduct from any recovery the reasonable litigation expenses and reasonable attorneys’ fees incurred in obtaining the recovery. Then the workers’ compensation carrier is reimbursed for all benefits it has paid, less its share of the litigation expenses and attorneys’ fees as described under the statute and clarified in the Supreme Court decision of Alvarado v. Kiewit Pacific Co.^[i] Moranz sought to challenge this statutory scheme by injecting equitable defenses such as the Made Whole Doctrine that would have permitted her to be fully compensated before DTRIC was able to recover anything by way of subrogation. Alternatively, she argued that the workers’ compensation carrier needed to prove that her settlement included compensation for special damages paid for by DTRIC.

The trial court ruled against Moranz. On December 15, 2020, the Court of Appeals also sided with DTRIC, ruling that the statutory language of § 386-8 unambiguously gives a workers’ compensation carrier first priority reimbursement, no matter how the recovered damages are classified. As the court observed, the statute clearly and unequivocally provides that the carrier has a lien “against the amount of the judgment for damages or settlement proceeds, the amount of the employer’s expenditure for compensation, less his share of such expenses and attorney’s fee.” Because the language of the statute was clear and unambiguous, the Court of Appeals refused to inject equitable principles that were not incorporated into the statute by the legislature.

In dismissing Moranz’ argument that DTRIC’s lien could not attach to her “general damages only” settlement, the Court of appeals said:

HRS § 368-8 does not specify any limitations as to what is subject to the workers’ compensation lien, does not distinguish between general or special damages in the recovery from a third-party, and does not provide that consideration be made whether parts of the recovery from a third-party is duplicative of workers’ compensation benefits that were paid. Instead, the language of HRS § 368-8 is unequivocal in terms of the amount of a third-party settlement that is subject to the right of reimbursement for workers’ compensation payments.

The Court of Appeals went on to calculate DTRIC’s share of costs and fees. Applying the well-settled Alvarado formula, the court calculated that DTRIC was responsible for $89,140.17 in costs and fees and thereby affirmed its lien reimbursement in the amount of $99,921.96.

Moranz appealed to the Hawaii Supreme Court and on January 11, 2022, the Hawai’i Supreme Court decided in favor of DTRIC. It held that:

• Common law defenses to subrogation such as the Made Whole Doctrine do not apply to DTRIC’s statutory rights of subrogation and reimbursement; and
• DTRIC’s lien extended to both special and general damages; and
• DTRIC was required to pay its full pro rata share of the attorney’s fees and costs Moranz incurred while pursuing her recovery based on the carrier’s total workers’ compensation liability, regardless of the amount carrier contributed in paid compensation versus calculable future benefits.

Similarly, the court ruled that § 386-8 states plainly that the insurer is entitled to reimbursement of its “expenditure for compensation” and contains no additional language limiting reimbursement to “special damages” or those benefits the insurer can prove are “duplicated” by the settlement. Section 386-8(d) also states plainly that the “entire amount of the settlement … is subject to the [insurer]’s right of reimbursement.” The Supreme Court felt that the statute’s use of the word “entire” is logically opposed to any argument that DTRIC is entitled only to reimbursement from a portion of the settlement.

Finally, the court clarified the proper timing of Alvarado calculations (which determines the reimbursement due a carrier from the third-party settlement) and the reimbursement process for a carrier when the amount it has already paid to the employee (“paid compensation”) is less than the amount it owes the employee for its “share” of attorney’s costs and fees for the third-party action. When an injured employee recovers a third-party settlement, the carrier is entitled to reimbursement of all benefits it has paid the employee, less its “share” of reasonable attorney’s fees and costs incurred by the employee in pursuing the third-party action.

The Supreme Court next calculated DTRIC’s share of costs and fees under Alvarado. The Court held that DTRIC’s full “share” of Moranz’s attorney’s fees and costs ($89,140.17) was based on its total workers’ compensation liability of $189,062.13 ($63,245.41 in “paid compensation” plus $125,816.72 in “future calculable benefits”). Under § 386-8(d), DTRIC was entitled to reimbursement of the $63,245.41 it had made in “paid compensation.” It is also relieved from the obligation to make further compensation payments to Moranz “up to the entire amount of the balance of the settlement or the judgment,” meaning that Moranz must exhaust $125,816.72 in “calculable future benefits” from the remainder of the Harbor Mall settlement. After paying her attorney’s fees and costs ($94,298.29), reimbursing DTRIC its “paid compensation” ($63,245.41), and exhausting “calculable future benefits” ($125,816.72) from the $200,000 Harbor Mall settlement, Moranz retained the remainder: $5,779.75 in excess of her benefits. Moranz had argued that because of the large amount of “future calculable benefits” owing, DTRIC’s share of costs and fees reduced its lien reimbursement to -$25,894.76—a negative number.

The Moranz decision is a win for subrogation and a stark reminder why we have a workers’ compensation system and the “Great Tradeoff” we engaged in which requires employers to insure themselves for injuries they often play no role in causing in exchange for exclusive remedy immunity and a right of recovery. These recoveries, in turn, help hold down employers’ experience modification factors and their future workers’ compensation premiums for years to come.

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[i] In Alvarado v. Kiewit Pacific Co., 993 P.2d 558 (Haw. 1999), aff’d in part, rev’d in part, 993 P.2d 549 (Haw. 2000), the court created a formula for determining the carrier’s share of the employee’s litigation costs and attorneys’ fees. An example to clarify distribution of settlement amount when the fraction resulting from employers’ share of attorneys’ fees and costs does not exceed the whole number (1) is as follows. Assuming third-party recovery of $200,000, attorneys’ fees and costs totaling $60,000, workers’ compensation expenditures to date equaling $100,000, and $25,000 in future workers’ compensation benefits—the fraction would be (1) $100,000 plus $25,000 divided by $200,000 or .625. This fraction should then be (2) multiplied by $60,000 or $37,500. This share should then be (3) subtracted from the $100,000 compensation paid, resulting in lien recovery of $62,500. The remaining $22,500 of the attorneys’ fees and costs should be (4) deducted from settlement of $200,000, resulting in $177,500 being the “net recovery” to plaintiff. Then, the $62,500 compensation lien should be (5) deducted from $177,500 resulting in $115,000 excess recovery to employee. However, employee must still (6) draw his $25,000 in future compensation benefits from $115,000 remainder, with net to employee in amount of $90,000, assuming that the $25,000 future benefit estimate is accurate.